Attar, AndreaORCID: https://orcid.org/0000-0002-0438-5804, Bozzoli, Lorenzo and Strausz, RolandORCID: https://orcid.org/0000-0001-7111-1486 (2026) Self-Revealing Renegotiation. TSE Working Paper, n. 26-1710, Toulouse

Preview

Text Download (616kB) | Preview

Abstract

We revisit the tension between the legal doctrine of renegotiation and economic efficiency. We introduce self-revealing mechanisms that combine bidirectional communication (the agent sends and receives information) with conditional disclosure (communication remains private during renegotiation but becomes verifiable at contract execution). In the canonical Fudenberg and Tirole (1990) framework, we design a self-revealing mechanism that fully mitigates the renegotiation threat by uniquely implementing the second-best allocation. Thus, the construction achieves the full-commitment outcome while satisfying renegotiation-proofness. Our optimal mechanism is structurally simple, and exploits signal disclosures to the agent to
construct incentive-compatible off-path punishments, which she activates after observing a renegotiation offer. It verifies standard commitment assumptions by only conditioning decisions on public information, without requiring any third-party enforcement. In practical terms, it can be implemented with existing smart-contract techniques. Our results extend to general settings of renegotiation.